Oil stocks are in a precarious position which leaves no alternative but to sell them. We have seen oil prices advance sharply higher over the last two months. This has been a combination of a stronger global economy and instability in the Middle East. With this rise in energy, stocks like Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) have soared. In July 2010, Chevron was trading at $67.00 per share. It now trades at $108.00, just off its 52 week highs. This gain is huge, coming in at over 60%. Exxon has had the same type of move as has other oil stocks like SandRidge Energy Inc. (NYSE:SD) have soared over 200% in that same time.
The reason why oil stocks should be sold is simple. Oil has reached a level just shy of $115.00 per barrel. As oil approaches that price, the markets seem to get skittish and sell off. When the whole market sells off, it is tough for energy stocks to push higher. The market sells on oil reaching this level because it hurts demand and the overall economy suffers. Not only do people drive less thus using less oil, but a slowing economy will also hurt demand through industrial channels. This hurts the amount of oil bought, thus profits for large oil companies may fall.
The other side of the coin shows a situation where oil falls. Imagine oil pulls back under $100 per barrel. Simply put, when oil falls, energy stocks like Chevron and Exxon sell off as well. If they are selling each barrel of oil for less and less, profits will take a hit. This puts oil stocks in a no win situation. This is a Catch 22. Not only have oil stocks rallied 60% or more in the last ten months, but a move higher or lower in oil will drive their stocks lower.
Oil stocks should be avoided at all costs. Some oil stocks can be shorted because of this as well. The no win situation will be a win for those that take profits and those that short in the coming months.
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